Page 6 - Newcom

6 |
INVESTMENT EXECUTIVE NEWS Regulatory timeline
for the years to come
December 2020
Regulators aim to tackle “short-and-distort” schemes
Keeping track of compliance developments during the pandemic hasn’t been easy. Here are the major upcoming deadlines.
BY KATIE KEIR
to conform with the Canadian FEBRUARY Securities Administrators’ (CSA)
client-focused reforms (CFRs).
CONTINUED FROM PAGE 1
recently, there have been con- cerns about the threat of activ- ist short-sellers — traders who don’t just quietly bet against companies they see as over- valued, but broadcast their views to the rest of the market.
Critics complain that activist short-sellers can make baseless allegations against a company in order to drive down its stock price and lock in an easy profit. Defenders of the practice argue these gadflies can help expose corporate misconduct and serve as an important check on the overwhelmingly positive bias in mainstream analyst coverage.
The most notorious recent example of this in Canada is Sino-Forest Corp., which traded at around $20 back in mid-2011 until U.S. hedge fund Muddy Waters LLC issued research alleging that the company was a massive fraud. The stock price plunged in the wake of those allegations, ultimately reaching zero when the hedge fund was largely proven right.
However, critics worry that most activist short-selling activ- ity isn’t nearly as accurate or helpful.
A new consultation paper from the Canadian Securities Administrators (CSA) solicited feedback on whether the concern about activist short-sellers is war- ranted — and what, if anything, needs to be done about them.
The CSA paper, which is out for comment until March 3, 2021, outlines concerns that activist short-selling is on the rise in Canada and that in gen- eral, Canadian regulators’ atti- tude regarding short-selling is lax. The CSA paper noted there currently is no real deterrent to baseless attacks by short-sellers, given that there has been little successful enforcement activity against them.
Despite the perception that short-sellers’ activism is on the rise, the CSA’s analysis found that the activity remains low relative to in the U.S. There was an average of five activist short campaigns per 1,000 listed com- panies over the past 10 years in Canada, well below the average of 21 targets per 1,000 firms in the U.S. over the same period.
In addition, the trend in activ- ist campaigns seems to be cyclical. For example, while there were 21 activist short-selling campaigns in 2016, there were only nine in 2017 before the number jumped to 22 in 2018, then dropped to seven the following year. So far in 2020, there have been 13 activist short-selling campaigns in Canada, according to research by New York-based Activist Insight Ltd.
The CSA paper suggested that short-selling activism fol- lows the markets, responding to perceived overvaluation. For example, the jump in activity in 2018 followed the flourishing of the cannabis sector: pot stocks accounted for 35% of the com- panies targeted by short-selling activists that year.
While short-selling activ- ism may not be as extensive as critics suggest, the CSA paper acknowledged that some believe Canada’s regulatory system is overly tolerant of the activity.
Short-selling rules in Canada differ from those in the U.S. and Europe, but the CSA maintains that the Canadian system meets the global regulatory standards set by the International Organization of Securities Commissions.
Nevertheless, the CSA con- sultation paper asked whether Canada’s approach needs to change. For example, the paper asked whether increasing disclo- sure obligations on short-sellers would curb abusive activity and give other investors and issu- ers more information about an activist’s positions.
At the same time, the CSA paper cautioned that added disclosure requirements on short-sellers could have unwelcome side effects, such as exposing traders’ strategies and opening short-sellers to increased legal and regulatory risks. Given that short-sellers already face inherent obstacles — from potentially unlimited risk inherent in an unhedged short to the cost of borrowing the securities to cover a short position — regulators worry that adding further disincentives may stifle legitimate short activ- ity, thus harming market liquid- ity and price discovery.
The CSA also is examin- ing the role of enforcement in preventing abusive short-and- distort behaviour.
To date, there has been little regulatory enforcement against activist short-sellers who claim a company is a fraud. When regu- lators have tried to bring cases against activist short-sellers — such as the Alberta Securities Commission’s (ASC) attempt to secure a cease-trade order against short-seller Marc Cohodes in 2018 — those efforts usually fail.
Proving that an activist short- seller has violated securities laws not only requires regulators to establish that the activist made false statements, but that their actions had a material impact on the market. The use of social media complicates this process: it’s not easy to prove that some- one yelling on Twitter was the reason a stock’s price dropped.
In the Cohodes case, for
JAN.
18 2021
Deadline for comment on the
Investment Industry Regulatory JANUARY
Organization of Canada’s (IIROC) proposed rule changes designed
JUNE
30 2021
2021
MARCH
Legend
n CSAdates n IIROCdates n MFDAdates
JAN.
18 2021
APRIL MAY
Deadline for comment on the Mutual Fund Dealers Association of Canada’s (MFDA) proposed rule changes that are designed to conform with the CFRs.
CSA amendments to harmonize the regulation of syndicated mortgages in Canada and enhance investor disclosure come into effect.
Phases 2 and 3 of IIROC’s client identifier amendments for dealer members come into effect for orders made for listed securities. Phase 1 of the amendments, which covered debt transactions, came into effect in 2019.
End of IIROC’s continuing education Cycle 8, which began on Jan. 1, 2020.
The CSA’s ban of deferred sales charge (DSC) mutual funds takes effect in all jurisdictions except Ontario. The Ontario Securities Commission (OSC) plans to limit the sale of DSC funds and issue a final rule on DSC sales in 2021.
Also on June 1, the CSA’s ban on trailer commissions paid to discount brokers takes effect. The entire CSA membership, including the OSC, will participate in the ban.
New conflict-of-interest
disclosure requirements come JUNE
into effect as part of the CFRs.
CFR requirements related to know-your-client, know- your-product, suitability and relationship disclosure come
AUGUST SEPTEMBER
JULY
MARCH
1 2021
DEC.
31 2021
into effect. OCTOBER NOVEMBER
Implementation date for IIROC’s
plain-language rule book. 2022
JANUARY FEBRUARY MARCH APRIL MAY
JULY AUGUST
SEPTEMBER OCTOBER
JULY
26 2021
DEC.
31 2021
DECEMBER
Issues to watch
Self-regulation review
After receiving comments in late October on the current framework for self- regulatory organizations, the Canadian Securities Administrators are working on a proposal for comment.
CE requirements
In March, the Mutual Fund Dealers Association of Canada (MFDA) proposed rules for continuing educa- tion (CE) accreditation. CE requirements for MFDA members were supposed to take effect before the end of 2020, but now the MFDA will finalize its CE policy and roll out the system in 2021.
National regulator
A spokesperson for the Capital Markets Regulatory Authority says no timeline has been set for implementing the regulator.
DEC.
31 2021
JUNE
JUNE
1 2022
Curbs on activists could have a chilling effect on legitimate criticism